<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
Commission File Number 333-11591
Tice Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware 62-1647888
(State of incorporation) (IRS Employer
Identification Number)
-----------------------------------------
6711 Tice Plaza
Knoxville, Tennessee 37918
(Address of principal executive office)
(423) 925-4501
(Registrant's telephone number, including area code)
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the registrants' two classes of
common stock on February 10, 1998 were 5,855,138 Common Shares and 750,000 Class
B Common Shares.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Page
----
Condensed Consolidated Balance Sheets -- As of December 31, 1997 2
and March 31, 1997
Condensed Consolidated Statements of Operations -- For the Three Months 4
and Nine Months Ended December 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows -- For the Nine Months 5
Ended December 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 6
<PAGE>
<TABLE>
<CAPTION>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
-------------------------------------
December 31, March 31,
1997 1997 (1)
(unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 27,158 $ 69,393
Accounts receivable 219,497 88,435
Prepaid expenses 80,757 48,408
Inventory, net 358,024 367,603
---------- ----------
Total current assets 685,436 573,839
Property and equipment:
Land 130,000 130,000
Equipment 526,964 521,574
Vehicles 124,599 124,599
---------- ----------
Total property and equipment 781,563 776,173
Less accumulated depreciation (600,010) (590,360)
---------- ----------
Property and equipment, net 181,553 185,813
Patents 170,728 159,432
Note receivable - split dollar life insurance 74,409 64,008
Other assets 32,140 24,640
---------- ----------
Total assets $1,144,266 $1,007,732
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(1) The March 31, 1997 condensed Consolidated Balance Sheet was derived from
audited financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
-------------------------------------
December 31, March 31,
1997 1997 (1)
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Notes payable to related parties $ 325,990 $ 217,542
Notes payable 259,105 350,054
Accounts payable and accrued liabilities 597,743 257,000
----------- ----------
Total current liabilities 1,182,838 824,596
Stockholders' equity:
Capital stock, no par value, 2,000 shares authorized, 13,493 8,634
750 and 780 shares issued and outstanding at March 31,
and December 31, 1997, respectively
Common Shares, par value $.01, 30,000,000 shares 58,551 0
authorized, 0 and 5,855,138 shares issued and outstanding
at March 31, and December 31, 1997, respectively
Class B Common Shares, convertible, par value $.01, 7,500 0
5,000,000 shares authorized, 0 and 750,000 shares
issued and outstanding at March 31, and December 31,
1997, respectively
Class D Common Shares, convertible, par value $.01, 0 0
600,000 shares authorized, none issued or outstanding
at March 31, and December 31, 1997, respectively
Preferred Shares, par value $.01, 10,000,000 shares 0 0
authorized, none issued or outstanding at March 31,
and December 31, 1997, respectively
Additional paid in capital 1,432,472 4,859
Retained earnings (accumulated deficit) (1,550,588) 169,643
----------- ----------
Total stockholders' equity (38,572) 183,136
----------- ----------
Total liabilities and stockholders' equity $ 1,144,266 $1,007,732
=========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
(1) The March 31, 1997 condensed Consolidated Balance Sheet was derived from
audited financial statements.
3
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Tice Technology, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
-----------------------------------------------
<TABLE>
<CAPTION>
For the three months For the nine months
ended December 31, ended December 31,
1997 1996 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Sales and service revenues $ 217,219 $ 356,868 $ 746,501 $ 898,367
License fees 0 0 250,000 0
Royalty fees 102,664 0 115,572 0
--------- --------- ----------- ----------
Total operating revenues 319,883 356,868 1,112,073 898,367
Operating expenses:
Cost of revenues 171,542 226,058 617,240 555,162
Research and development 59,975 34,843 147,298 83,932
Selling, general and administrative 206,568 231,575 1,987,251 533,745
--------- --------- ----------- ----------
Total operating expenses 438,085 492,476 2,751,789 1,172,839
Operating loss (118,202) (135,608) (1,639,716 ) (274,472)
Other income (expense):
Rental income 0 0 0 28,200
Rental expense 0 (2,786) 0 (19,153)
Interest expense - related parties (4,796) (8,619) (38,569) (11,212)
Interest expense (4,861) (10,810) (39,271) (66,700)
Other income 158 3,025 2,325 3,942
Gain on sale of fixed assets 0 32,000 0 500,364
--------- --------- ----------- ----------
Total other income (expense) (9,499) 12,810 (75,515) 435,441
--------- --------- ----------- ----------
Income (loss) before income taxes (127,701) (122,798) (1,715,231) 160,969
Provision (benefit) for income taxes 0 (37,019) 5,000 8,224
--------- --------- ----------- ----------
Net income (loss) $(127,701) $ (85,779) $(1,720,231) $ 152,745
========= ========= =========== ==========
Basic and diluted income (loss) per
share (Note 5) $ (0.02) $ (0.01) $ (0.27) $ 0.03
========= ========= =========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
Tice Technology, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
December 31, December 31,
1997 1996
(unaudited)
Net cash used by operating activities $(319,078) $(255,533)
--------- ---------
<S> <C> <C>
Cash flows from investing activities:
Proceeds from sale of fixed assets 824 824,475
Capital expenditures (6,214) (6,473)
Additions to patents and other assets (33,104) (63,059)
--------- ---------
Net cash provided (used) by investing activities (38,494) 754,943
--------- ---------
Cash flows from financing activities:
Net proceeds of notes payable to related parties 254,221 98,235
Net proceeds (payments) of notes payable 28,958 (569,934)
Proceeds from issuance of stock and stock warrants 32,158 0
--------- ---------
Net cash provided (used) by financing activities 315,337 (471,699)
--------- ---------
Net increase (decrease) in cash and cash equivalents (42,235) 27,711
Cash and cash equivalents, beginning of period 69,393 2,822
--------- ---------
Cash and cash equivalents, end of period $ 27,158 $ 30,533
========= =========
</TABLE>
Non-cash investing and financing activities; during the nine months ended
December 31, 1997, $265,680 of debt was converted into common stock.
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE>
Tice Technology Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements include the
accounts of Tice Technology, Inc. ("TTI") and the accounts of its wholly
owned subsidiary, Tice Engineering and Sales, Inc. ("TES"). The
consolidation of these entities will collectively be referred to as the
Company. All significant intercompany balances and transactions have been
eliminated.
These financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the audited financial statements
of the respective companies as of and for the period ended March 31, 1997.
The information furnished reflects all adjustments which are necessary for
a fair presentation of the Company's financial position as of December 31,
1997; the results of its operations for the three month periods and nine
month periods ended December 31, 1997 and 1996; and its cash flows for the
nine month periods ended December 31, 1997 and 1996. All such adjustments
are of a normal recurring nature.
2. Results of Operations
The results of operations for the three month periods and nine month
periods ended December 31, 1997 and 1996 are not necessarily indicative of
the results to be expected for the respective full years.
3. Inventory
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ---------
<S> <C> <C>
Raw Materials $ 363,208 $ 306,920
Work In Process 66,693 124,810
Finished Goods 48,123 55,873
--------- ---------
478,024 487,603
Reserve for Obsolescence (120,000) (120,000)
--------- ---------
Inventory, net $ 358,024 $ 367,603
========= =========
</TABLE>
6
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4. Recapitalization
The Company's registration statement became effective on August 1, 1997. At
that time, TTI acquired all of the issued and outstanding stock of TES
including 750 shares outstanding at March 31, 1997 and 30 shares issued in
connection with the exercise of warrants subsequent to March 31, 1997, from
the shareholders of TES in exchange for 5,450,220 Common Shares and 750,000
Class B Common Shares. In addition, Monogenesis Corporation purchased
300,000 Common Shares and 1,000,000 warrants to purchase Common Shares at
par value ($.01). A portion of the shares and warrants has been distributed
to Monogenesis shareholders. Each warrant entitles the holder to purchase
one Common Share of TTI at an exercise price of $8.00. As of December 31,
1997 400 Common Shares had been issued upon the exercise of 400 warrants.
In addition, TTI issued 88,560 Common Shares at a conversion price of $3.00
per share to holders of $265,680 of TES convertible debt. Also options to
purchase 43,750 common shares were granted to employees of TES on August 1,
1997 at an exercise price of $1.00 per share. As of December 31, 1997
15,958 Common Shares had been issued upon the exercise of employee stock
options. Additional 11,000 options for Common Shares are expected to be
granted to employees of TES within the next 90 days. Based upon an initial
share value of $3.50, the conversion of debt, the issuances to Monogenesis
and the granting of the 43,750 options, TTI incurred interest charges of
$44,280, offering expenses of $1,047,000 and compensation expense of
$109,375 during the nine months ended December 31, 1997. Additional
compensation expense may be incurred depending upon the market value in
effect at such time when the remaining options are granted.
In accordance with Statement of Financial Accounting Standard No. 123 (SFAS
123), the Company will record all stock based compensation awarded to
vendors at the fair value of the services received. As permitted by SFAS
123, the Company applies APB Opinion 25 (APB 25) and related
interpretations in accounting for any stock based compensation awarded to
employees or outside directors.
5. Income per Share
Effective December 31, 1997, the Company adopted SFAS 128, Earnings Per
Share. Under SFAS 128, basic and diluted income (loss) per share were
$(0.02) and $(0.01) for the respective three month periods ended December
31, 1997 and 1996 and $(0.27) and $0.03 for the respective nine month
periods ended December 31, 1997 and 1996. Basic income (loss) per share
were computed by dividing net income (loss) applicable to common stock by
the weighted average common shares outstanding during each period. Diluted
income (loss) per share were computed by dividing net income (loss)
applicable to common stock plus the effect of assumed conversion of debt by
weighted average common shares outstanding plus dilutive potential common
shares. Potential common shares are not included in the computation of
diluted per share amounts in periods when the Company reports a loss. Basic
and diluted income (loss) per share are the same for both classes of TTI
common stock (thus they are not presented separately) because both have
noncumlative dividend rights of which none were available for distribution
under the terms of the Certificate of Incorporation. Due to the Company's
recapitalization in August 1997, all
7
<PAGE>
common share and per share amounts in the accompanying financial statements
have been restated. Following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share:
<TABLE>
<CAPTION>
For the three months For the nine months
ended December 31, ended December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Income (loss)
Basic:
Income (loss) available to $ (127,701) $ (85,779) $(1,720,231) $ 152,745
common stockholders
Effect of dilutive securities:
Convertible debt $ 0 $ 0 $ 0 $ 7,000
Diluted:
Income (loss) available to common $ (127,701) (85,779) $(1,720,231) $ 159,745
stockholders + assumed conversions ========== ========== =========== ==========
Shares
Basic:
Weighted average common shares 6,605,918 5,962,500 6,316,319 5,962,500
outstanding
Effect of dilutive securities:
Convertible debt 0 0 0 42,171
Warrants 0 0 0 170,357
---------- ---------- ----------- ----------
Diluted:
Weighted average common shares 6,605,918 5,962,500 6,316,319 6,175,028
outstanding + assumed conversion ========== ========== =========== ==========
</TABLE>
6. Effect of New Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) 129, Disclosure of Information About Capital Structure,
which is effective for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income,
which is effective for fiscal years beginning after December 15, 1997.
Additionally, in June 1997, the FASB issued SFAS 131, Disclosures about
Segments of an Enterprise and Related Information, which is also effective
for fiscal years beginning after December 15, 1997. The Company expects
that SFAS 129 and 130 will have no material impact on the financial
statements of the Company. SFAS 131, which relates to additional
disclosures regarding business segments, will have no impact on the
Company.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
The following analysis of the financial condition and results of operations
of Tice Technology, Inc. ("TTI") and its subsidiary, Tice Engineering and Sales,
Inc. ("TES"), collectively referred to as the "Company," should be read in
conjunction with the Condensed Consolidated Financial Statements and Notes
thereto included herein.
Since 1964, TES has been developing products, which provide technical
solutions to problems relating to the manufacturing process of various companies
with a primary concentration in the sewing industry. TES designs, manufacturers,
assembles and markets its products directly to existing customers as well as
through its dealer network. Ninety-five percent (95%) of TES's customers are
repeat customers with much of its product line having been produced to address
the problems of a particular customer. TES generally retains the right to market
the resulting equipment to other customers with similar requests. TES also
obtains patents on a majority of its products and licenses its technology on a
non-exclusive basis to customers who want to manufacture various products using
the technology developed and patented by TES.
TTI was formed on June 21, 1996, to acquire and hold all of the issued and
outstanding stock of TES. When TTI's registration statement became effective on
August 1, 1997, all the TES shares were exchanged for shares of TTI. TTI's only
activity through August 1, 1997 was in conjunction with the incorporation and
registration process.
Results of Operations
The Company's revenues historically have been generated primarily from the
sales of its products and services, with service revenues representing less than
1% of such revenues. Since TES obtained a patent on its electronic gearing
technology in 1995 and in 1997 began licensing the non-exclusive rights to
manufacture equipment using the technology to other manufacturers, TES has begun
receiving license fees and royalties. The nine months of fiscal 1998 ending
December 31, 1997 reflect the receipt of revenues from license fees and
royalties, as compared to the nine months ended December 31, 1996 which had no
license fee or royalty revenues. Management expects that during the next two
years license fee revenue will become a larger portion of total revenues for the
Company. The principal reason for the expected growth in this area is the
anticipation of additional earnings under the license agreement currently in
place with Brother Industries, Ltd. of Nagoya, Japan as well as expected
successful results of current negotiations with other manufacturers to enter
into additional license agreements.
The Company's product sales and service revenues have previously been
largely attributable to sales to three primary customers. Two of these customers
represented 72.0% of product sales revenues in the first nine months of fiscal
1997, whereas the first nine months of fiscal 1998 reflected three primary
customers which represented a total of 70.4% of product sales revenues for the
period. The lower percentage being distributed among these primary customers is
a direct reflection on the Company's concentration on its international sales
efforts. One of
9
<PAGE>
the Company's distributors in Mexico has become a primary customer representing
20.8% of product sales for the first nine months of fiscal 1998. Although
international sales as a whole have increased from 3.6% in the first nine months
of fiscal 1997 to 24.3% in the first nine months of fiscal 1998, there are no
gains or losses included in operations related to foreign currency exchanges due
to the terms of international sales which require payment in U.S. currency.
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items reflected in the Company's
condensed consolidated statements of operations.
<TABLE>
<CAPTION>
Percentage of Total Revenues
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Operating revenues:
Sales and service revenues 67.9% 100.0% 67.1% 100.0%
License fees 0.0% 0.0% 22.5% 0.0%
Royalty fees 32.1% 0.0% 10.4% 0.0%
------ ------ ------ -----
Total operating revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenues 53.6% 63.4% 55.5% 61.8%
Research and development 18.7% 9.7% 13.2% 9.3%
Selling, general and administrative 64.6% 64.9% 178.7% 59.4%
------ ------ ------ -----
Total operating expenses 136.9% 138.0% 247.4% 130.5%
Operating loss (36.9%) (38.0%) (147.4%) (30.5%)
Other income (expense):
Rental income 0.0% 0.0% 0.0% 3.1%
Rental expense 0.0% (0.7%) 0.0% (2.1%)
Interest expense - related parties (1.5%) (2.4%) (3.5%) (1.3%)
Interest expense (1.5%) (3.0%) (3.5%) (7.4%)
Other income 0.0% 0.8% 0.2% 0.4%
Gain on sale of fixed assets 0.0% 8.9% 0.0% 55.7%
----- ------ ------ ----
Total other income (expense) (3.0%) 3.6% (6.8%) 48.4%
----- ------ ------ ----
Income (loss) before income taxes (39.9%) (34.4%) (154.2%) 17.9%
Provision (benefit) for income taxes 0.0% (10.4%) 0.4% 0.9%
----- ------ ------ ----
Net income (loss) (39.9%) (24.0%) (154.6%) 17.0%
===== ====== ====== ====
</TABLE>
10
<PAGE>
Three Months Ended December 31, 1997 and December 31, 1996
Total Revenues. Total revenues for the third quarter of fiscal 1998 which
ended December 31, 1997 decreased by 10.4% to $319,883 from $356,868 for the
same three month period in the previous year. The third quarter of fiscal 1998
reflected royalty revenues, which represented 32.1% of total revenues, which
amounted to $102,664 whereas the same period of the prior year had no royalty
income. The 1998 royalties reported are based on royalties due from Brother
Industries Ltd. of Nagoya, Japan for products incorporating the patented
electronic gearing technology and know-how they manufacture under license from
Tice. Royalty revenues helped offset a reduction in product sales and service
revenues that were down 39.1% for the three-month period of fiscal 1998 as
compared to the same period of the previous year. This reduction was due to a
delay in shipping single needle belt loop machines until the fourth quarter of
fiscal 1998 amounting to approximately $100,000 as well as the reduction of
sales of automatic J-tackers. The delay in shipping was due to modifications to
the machines to allow the customer to sew a wider than normal belt loop. This
engineering modification has been completed and the machines are scheduled for
shipment during the fourth quarter of fiscal 1998. The J-tackers represented
$116,000 in product sales in the third quarter of fiscal 1997 as compared to
$15,000 in the third quarter of fiscal 1998. Sales of the label loader/folders
and belt loop machines represented 25.5% and 30.1%, respectively, of total
product sales revenue for the third quarter of fiscal 1998 as compared to sales
of the automatic J-tackers and label loader/folders which represented 32.4% and
22.1%, respectively, of total revenues for the same period of the previous year.
Remaining product sales in both periods were generated from a mix of the
Company's other traditional products. The timing of sales of a particular
product from period to period may fluctuate greatly depending on customer needs.
Typically a customer will replace or upgrade a particular piece of equipment
throughout one plant in one quarter as their budget permits and therefore
product sales broken down by item by period is not necessarily indicative of the
total sales volume of that item for the year.
Cost of Revenues. Cost of revenues as a percentage of sales decreased 9.8%
to 53.6% of sales for the third quarter of fiscal 1998 as compared to 63.4% of
sales for the third quarter of fiscal 1997. This decrease in cost of revenues is
a result of the recording of royalty revenue in the third quarter of the 1998
fiscal year which had no associated cost. The royalty revenue helped to offset
increases in direct labor and related benefits as well as increased overhead
applied relating to increases in rent expenses incurred during the 1998 period.
Research and Development. Research and development costs increased by
72.1% to $59,975 in the third quarter of fiscal 1998 from $34,843 in the third
quarter of fiscal 1997 due to increased salaries and benefits relating to
engineering as well as increases in officers' salaries and increased R&D
inventory. As the demand for the Tice electronic gearing technology grows, the
Company is making preparations to meet the existing and expected future demand
by increasing engineering personnel. The research and development department
also works to develop products for the Company's standard product line, which
use conventional technology.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expense decreased 10.8% from $231,575 in the third quarter of fiscal
1997 to $206,568 in the third quarter
11
<PAGE>
of fiscal 1998. The decrease resulted from the lack of expenses related to the
registration of TTI stock in the 1998 period. The Company had incurred $32,000
of such expenses in the 1997 period. Salary and related benefits decreased
21.3%, approximately $30,000, in the third quarter of fiscal 1998 as compared to
the same period in fiscal 1997. Although sales and service salaries increased as
the result of the addition of a national sales manager, this was offset as more
officer salaries were allocated to research and development reflecting the
additional time devoted to that area.
Operating Loss. The operating loss decreased from a loss of $135,608 in
the third quarter of fiscal 1997 to an operating loss of $118,202 in the third
quarter of fiscal 1998. This decrease was the direct result of the recording of
royalty revenues in the third quarter of fiscal 1998 which had no cost
associated to it. This revenue helped to offset losses that resulted from the
lower sales revenue generated in the third quarter of fiscal 1998 as well as
increased expenditures for research and development. Management recognizes that
expenses will continue to increase as the Company continues to hire additional
personnel to facilitate the design and manufacture of equipment.
Interest Expense and Interest Expense - Related Parties. Interest expense
and interest expense - related parties decreased from $19,429 in the third
quarter of fiscal 1997 to $9,657 in the fiscal 1998 period primarily due to the
conversion of a substantial portion of debt to stock upon the effective date of
the Company's registration statement.
Income Taxes. The Company's effective tax rate was 0% in the 1998 period
as compared to (23%) in the 1997 period principally due to significant permanent
differences related to non-deductible registration expenses incurred in fiscal
1998 and the recording of a valuation allowance.
Nine Months Ended December 31, 1997 and December 31, 1996
Total Revenues. Total revenues increased 23.8% in the first nine months of
fiscal 1998 to $1,112,073 from $898,367 in the first nine months of the prior
year. This increase resulted from license fees and royalties totaling $365,572
from the non-exclusive license agreement with Brother Industries, Ltd. The
license fee income represented the initial fee due from Brother upon the sale of
the second class of machine under the agreement, the multi-head embroidery
machine. Royalties are based on sales of all machines under license using the
electronic gearing technology and know-how, and are due on a semi-annual basis
reported July and January each year. Sales of equipment utilizing Tice
electronic gearing technology by the Company's licensee, Brother Industries Ltd.
of Nagoya, Japan as reported for the six month period ending December 31, 1997,
resulted in an approximate 700% increase in sales over that of the six month
period ending June 30, 1997. Product sales decreased 17.0% from the 1997 period
to the 1998 period. The offsetting decrease in sales and service revenues was
partially attributed to delays in machine shipments scheduled for the third
quarter of fiscal 1998 totaling approximately $100,000. This delay was due to
machine modifications that have since been completed, and shipments have been
scheduled in the fourth quarter of fiscal 1998. The Company is continually
updating its products to meet customer needs and adding to its existing product
line to remain competitive which is evidenced by 95% of TES's customers being
repeat customers. The leading sales items for both periods were the label
loader/folders. Sales volume of a particular product can vary greatly from
quarter to quarter as
12
<PAGE>
customers update or replace equipment depending on their needs and budget
requirements. In the fiscal 1998 period sales of the label loader/folders,
single needle belt loop machines, and ergonomic stands represented 25%, 23.7%,
and 15.0%, respectively, of product sales revenue as compared to sales of the
label loader/folders and automatic J-tackers which represented 37.7% and 20.0%,
respectively, of product sales revenue for the 1997 period. All of these items
are from TES's standard product line. Remaining product sales for both periods
were from sales of a variety of other products and replacement parts in TES's
standard product line.
Cost of Revenues. Cost of revenues increased 11.1% from $555,162 in the
1997 fiscal period to $617,240 in the 1998 fiscal period. This increase was
primarily due to increases in direct labor and overhead applied. Cost of direct
labor increased 22.9% as a result of increases in salary and related benefits
beginning in the fourth quarter of fiscal 1997. Total overhead applied increased
51.7% from $93,198 in the 1997 period to $141,373 in the 1998 period as a result
of: (i) increases in salary and related benefits expenses beginning in the
fourth quarter of fiscal 1997; and (ii) rent expenses which were not incurred
until the third quarter of fiscal 1997 as the Company owned the facility it
currently occupies until September 1996.
Research and Development. Research and development ("R&D") costs increased
by 75.5% to $147,298 in the first nine months of fiscal 1998 from $83,932 in the
first nine months of fiscal 1997 due to increased salaries and benefits relating
to engineering as well as the allocated portion of officers' salaries and
increases in material purchases for R&D inventory. As the demand for the Tice
electronic gearing technology is growing, TES is making preparations to meet the
existing and expected future demands by increasing engineering personnel. The
research and development department also works to develop products to add to
TES's standard product line, which do not use the electronic gearing technology.
Selling, General and Administrative. SG&A expense increased approximately
$1,454,000 or 272.3% to $1,987,251 in the first nine months of fiscal 1998 from
$533,745 in the first nine months of fiscal 1997. This increase was primarily
the result of recording $1,431,997 in the 1998 period to reflect the non-
recurring expenses relating to the registration process, stock distribution and
implementation of a stockholder relations program; whereas the 1997 period
reflected only $95,260 in non-recurring expenses relating to the registration
process. The remaining SG&A expense for the fiscal 1998 period represent a 26.6%
increase over the 1997 period. This increase was primarily the result of
increases in salary and related benefits and legal and accounting expenses
although they were somewhat offset by decreases in airplane expense during the
1998 fiscal period. Salary and related expenses increased 20.2% in the first
nine months of fiscal 1998 over the same 1997 period as a result of increases in
salaries and related benefits in the fourth quarter of the 1997 period, and
expenses related to recruiting additional personnel during the first nine months
of the 1998 fiscal year. Legal and accounting expenses increased $61,017 from
$5,471 in the fiscal 1997 period to $66,488 in the fiscal 1998 period. The
increase in the 1998 fiscal period was due to an increase in fees related to the
fiscal 1997 annual audit performed in the first quarter of fiscal 1998 as well
as fees relating to legal and accounting services associated with quarterly
reporting requirements. Reductions in airplane expenses from $21,266 in the
fiscal 1997 period to $5,466 in the fiscal 1998 period helped offset other
increases in SG&A expense as the Company adapted more
13
<PAGE>
of its travel needs to commercial airlines as opposed to charter aircraft.
Travel and related expenses increased 30% from $28,696 in the 1997 fiscal period
to $30,307 in the 1998 period as a result of the extended trip length that is
inherent with most commercial travel arrangements.
Operating Loss. The operating loss increased from $274,472 in the first
nine months of fiscal 1997 to $1,639,716 in the first nine months of fiscal
1998. This loss resulted primarily from the expenses incurred upon the effective
date of the registration of TTI stock in the second quarter of fiscal 1998.
Interest Expense and Interest Expense-Related Parties. Interest expense and
interest expense-related parties decreased slightly from $77,912 in the 1997
period to $77,840 in the 1998 period. Interest expense increased $44,280 in the
1998 fiscal period as a result of a non-cash interest charge of $44,280 upon the
effective date of the Company's registration statement, but was offset by
substantial repayments of outstanding indebtedness.
Gain on Sale of Fixed Assets. Gain on sale of fixed assets during the first
nine months of fiscal 1997 resulted from the sale of the rental property during
that period. There have been no significant fixed asset sales in fiscal 1998.
Income Taxes. The Company's effective tax rate was 0.3% in the 1998 period
as compared to 5.0% in the 1997 period principally due to significant permanent
differences related to non-deductible registration expenses and the recording of
a valuation allowance.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations through a
combination of cash flows from operations, bank borrowings and borrowings from
individuals. The Company's capital requirements have arisen primarily in
connection with purchases of fixed and intangible assets. The Company also makes
significant expenditures each year for research and development and marketing
new technology.
Net cash used by operating activities was $319,078 in the nine-month period
ended December 31, 1997 and net cash used by operating activities was $255,533
in the same period of the previous year. The primary cause for the change was
increases and decreases in working capital items.
Net cash used by investing activities was $38,494 in the 1998 period and
net cash provided by investing activities was $754,943 in the 1997 period.
Primary use of funds was related to capital expenditures, patents and notes
receivable. Capital expenditures totaled approximately $6,200 in the 1998 period
and $6,500 in the 1997 period. Capital expenditures are expected to increase
over the next two years during which time the Company expects to move from its
existing facility. See "Future Operations." The primary source of funds in the
1997 period was proceeds from the sale of fixed assets.
14
<PAGE>
Net cash provided by financing activities was $315,337 in the 1998 period
and net cash used by financing activities was $471,699 in the 1997 period. The
cash provided by financing activities in the 1998 period was related primarily
to proceeds from issuance of stock and notes payable issued to related parties.
The cash used by financing activities in the 1997 period was related to payments
on notes payable to related parties and the repayment of a substantial portion
of debt upon the sale of the shopping center.
The Company's principal commitments at December 31, 1997 consisted
primarily of notes payable to related parties as well as other notes payable.
The Company used the proceeds of these notes to provide working capital for
operations and for the continuing development of the electronic gearing
technology as well as to fund the costs of license and royalty agreement
negotiations and registration of securities of TTI. Several of these notes were
extended to retain working capital. On August 1, 1997, the effective date of the
registration statement, $145,770 of notes payable to related parties and
$119,910 of notes payable were converted to 88,560 Common Shares of TTI at $3.00
per share. Remaining notes payable, with interest rates ranging from 10% to
prime plus 1% are due in fiscal 1998. The company plans to extend the remaining
related party notes payable if working capital is not sufficient to repay the
loans. Due to the continuing demand for the new technology, management is
actively seeking up to a $2,000,000 line of credit to provide funds for the
tooling, inventory, and additional personnel needed to meet the industry's
demands for the new technology. There are no significant restrictive covenants
relating to the existing notes payable, although several of the notes are
personally guaranteed by the President of the Company.
Effect of Recently Issued Accounting Standards
In February 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) 129, Disclosure of Information About Capital Structure, which
is effective for periods ending after December 15, 1997. In June 1997, the FASB
issued SFAS 130, Reporting Comprehensive Income, which is effective for fiscal
years beginning after December 15, 1997. Additionally, in June 1997, the FASB
issued SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, which is also effective for fiscal years beginning after December
15, 1997. The Company expects that SFAS 129 and 130 will have no material impact
on the financial statements of the Company. SFAS 131, which relates to
additional disclosures regarding business segments, will have no impact on the
Company.
Future Operations
To provide for continued growth, the Company requires a new facility for
which it has completed plans over the past several months. Estimated costs of
building the facility are $1,600,000. The Company owns undeveloped land upon
which the facility could be built; however, after careful consideration,
management has decided that the undeveloped property, known as "Tice Corporate
Park," is not adequate for additional future expansion, which may be required
within the next three to five years. Having recognized that expansion may be
necessary, management has decided to sell the property it currently owns.
Several other parcels of land are being considered for the new facility. The
location under primary consideration has better access to the interstate system
15
<PAGE>
and provides considerable tax advantages to the Company. The Company anticipates
that the relocation will delay completion of the facility until the fall of
1998, but the benefits are expected to outweigh the inconvenience in many
respects as the Company should have ample room for long term growth. The cost of
the land and facility is expected to be funded through a combination of cash
received from the sale of the current property, cash flows from operations and
proceeds from notes payable to be incurred.
Management believes that its traditional products will continue to generate
sales revenue and that TES will continue to solve other problems for customers
as they arise in their manufacturing processes. In addition, management believes
that there is a great demand for products incorporating the electronic gearing
technology and is designing various machines using the new technology including
a multi-head button hole machine, a multi-head button sewing machine, a felling
machine, a single needle plain sewer and a heavy duty spinning machine. In the
December 1997 issue of the BOBBIN trade magazine, Mr. Bernie Caplan, senior
vice-president of industrial products for Brother International Corporation, is
quoted as saying, "In sewing, our strongest products have been electronic
double-needle tackers." He also said, "There will be more growth in offshore
markets, and I think we'll have substantial growth in embroidery in North
America." Both of these machines use Tice electronic gearing technology and
know-how. The success of the electronic gearing technology is evidenced by the
approximately 795% increase in royalties in the past six months as compared to
the previous six months. In addition to revenues, which may be generated from
the sale of products using the new technology, TES also expects to continue to
develop additional license and royalty agreements with its customers and is
currently in both formal and informal negotiations in this regard. While TES has
signed one such agreement, management believes that other sewing machine
manufacturers will license the technology to remain competitive with the initial
licensee. Management intends to use these funds to market its traditional
product line and to expand operations to ensure that all orders for the new
technology are efficiently filled.
As of December 31, 1997, TES had backlog orders it believes to be firm
totaling approximately $179,000 for equipment using traditional technology. This
backlog of orders is expected to be completed by March 1998. In addition, TES
has received indications of interest for additional orders totaling
approximately $750,000 relating to products using the new electronic gearing
technology upon completion of production models and for equipment using
traditional technology. There is no assurance that these indications of interest
will become firm orders.
Although the Company has no present acquisition agreement or arrangements,
management may make strategic acquisitions in the future which may or may not be
in related industries, using stock, cash, debt or a combination thereof.
Depending on the terms of the acquisition, the Company may need to incur
additional indebtedness or issue equity securities to make any such acquisition.
Management has not identified any particular targets for acquisition.
The Company believes that future results of operations will be influenced
by a number of factors, including general economic conditions, dependence on key
customers and market acceptance of new technology. Because of these factors, as
well as other factors, historical results should not be relied upon as an
indicator of future performance.
16
<PAGE>
Inflation
Inflation has not had a significant impact on the Company's operations to
date.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
TTI does not have any market risk sensitive instruments.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
TTI's registration statement became effective on August 1, 1997 (SEC file
number 333-11591). Under the registration statement, TTI registered 300,000
Common Shares and 1,000,000 Common Stock Purchase Warrants (the "Warrants")
which were sold to Monogenesis Corporation ("Monogenesis") for a total of
$13,000. Monogenesis, as statutory underwriter, distributed 125 shares and 400
Warrants to each of its shareholders for each share of stock of Monogenesis held
by them. Monogenesis retained 44,375 Common Shares and 182,000 Warrants. TTI
also registered 1,541,407 Common Shares for shareholders of TTI, 54,750 Common
Shares underlying employee stock options, 88,560 Common Shares issued in
satisfaction of $255,187 in principal of notes and a portion of the interest on
such notes and the 1,000,000 Common Shares underlying the Warrants. Each Warrant
entitles the holders to purchase one Common Share for $8.00 for 24 months.
All of the shares and Warrants to be distributed by Monogenesis have been
distributed. The selling shareholders may sell their shares from time to time at
market price or in negotiated or other transactions. TTI believes that selling
shareholders that own over 5%of TTI's Common Shares have sold 42,450 Common
Shares under the registration statement during the third quarter of fiscal 1998.
Since August 1, 1997, the effective date of the registration statement, and
prior to December 31, 1997, TTI has incurred for its account in connection with
the issuance and distribution of the securities registered the following
amounts:
<TABLE>
<CAPTION>
Direct or Indirect Payments
to Directors, Officers, Holders
of 10% of Any Class of Stock Direct or Indirect
or Affiliates of TTI Payments to Others
------------------------------- ------------------
<S> <C> <C>
Underwriting Discounts
or Commissions 0 $ (1)
Finders' Fees 0 0
Underwriter's Expenses 0 0
Other Expenses 0 175,940
-- --------
Total Expenses $0 $175,940 (1)
</TABLE>
17
<PAGE>
(1) TTI recorded $1,047,000 in expenses and in additional paid in capital based
upon the estimated fair value of the 300,000 Common Shares issued to
Monogenesis less the $0.01 per share price it paid for the shares. The
estimated fair value of the shares retained by Monogenesis at the time was
$155,313.
During the third quarter of fiscal year 1998, TTI has received proceeds of
$3,200 upon the exercise of 400 Warrants and $15,958 upon the exercise of
employee stock options to purchase 15,958 Common Shares.
There were no net offering proceeds to TTI since there were no significant
offering proceeds ($255,187 in reduction of debt, $13,000 cash to purchase the
securities to be distributed and $19,158 from exercise of Warrants and options),
nor were there intended to be any significant proceeds. The registration
statement primarily related to a distribution of shares and warrants as a
dividend and not to a traditional sale of securities.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Index
<TABLE>
<CAPTION>
Exhibit Page
Table Number Number
------------- ------
<S> <C> <C>
I. Plan of Acquisition, Reorganization, Arrangement, 2
Liquidation or Succession
(i) Stock Purchase Agreement and Plan of +
Reorganization (including all schedules)
II. Articles of Incorporation and Bylaws 3
(i) Certificate of Incorporation of Tice Technology, (i) +
Inc.
(ii) Bylaws of Tice Technology, Inc. (ii) +
III. Instruments Defining Rights of Security Holders 4
(i) Common Stock Purchase Warrant Agreement *
Between Tice Technology, Inc. and Warrant Agent
IV. Material Contracts 10
(i) Agreement Between Tice Technology, Inc. and *
Transfer Agent
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Table Number Number
------------- ------
<S> <C> <C>
V. Financial Data Schedule 27 20
</TABLE>
* Previously filed as an exhibit to the Registration Statement on Form S-1 of
Tice Technology, Inc. which became effective August 1, 1997.
+ Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the above
described Registration Statement.
(b) No reports have been filed on Form 8-K.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Tice Technology, Inc.
By: /s/ William A. Tice
------------------------------
William A. Tice, President
Date: February 12, 1998
------------------------------
By: /s/ Karen A. Walton
------------------------------
Karen A. Walton,
Chief Financial Officer
Date: February 12, 1998
------------------------------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Financial Statements of Tice Technology, Inc. for the Nine Months Ended December
31, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997
<PERIOD-START> APR-01-1997 APR-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 27,158 0<F1>
<SECURITIES> 0 0<F1>
<RECEIVABLES> 219,497 0<F1>
<ALLOWANCES> 0 0<F1>
<INVENTORY> 358,024 0<F1>
<CURRENT-ASSETS> 685,436 0<F1>
<PP&E> 781,563 0<F1>
<DEPRECIATION> 600,010 0<F1>
<TOTAL-ASSETS> 1,144,266 0<F1>
<CURRENT-LIABILITIES> 1,182,838 0<F1>
<BONDS> 0 0<F1>
0 0<F1>
0 0<F1>
<COMMON> 79,544 0<F1>
<OTHER-SE> (118,116) 0<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1,144,266 0<F1>
<SALES> 746,501 898,367
<TOTAL-REVENUES> 1,112,073 898,367
<CGS> 617,240 555,162
<TOTAL-COSTS> 2,751,789 1,172,839
<OTHER-EXPENSES> 0 19,153
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 77,840 77,912
<INCOME-PRETAX> (1,715,231) 160,969
<INCOME-TAX> 5,000 8,224
<INCOME-CONTINUING> (1,639,716) (274,472)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,720,231) 152,745
<EPS-PRIMARY> (0.27) 0.03
<EPS-DILUTED> (0.27) 0.03
<FN>
<F1> Balance Sheet information for the 1997 interim period not included in this
filing.
</FN>
</TABLE>
